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How to Valuate and Merge Businesses

Once you've reviewed these valuation and merger basics, use a business loan from Citizens Bank to help your business grow

Merging two businesses is a complex process that requires serious thought and consideration.While professional legal counsel should be involved when working out the details, this guide is meant to provide some preliminary points of evaluation. So if you're interested in learning whether a merger will benefit your company, or would like to know how businesses are valued, here's an introduction to the merger process.

Why merge two businesses?

A merger or acquisition is often a way for a company to grow quickly. Rather than increase revenue and market share organically over time, two companies may combine to pool their resources. In addition to growth, a merger also often results in increased efficiency. Common resources can be utilized, and redundancies eliminated, when two companies become one.

When's the right time to merge?

Before a merger is agreed upon, a business case has to be made. Analysts and consultants can evaluate the strength of each company and determine whether a merger would be beneficial. Once the details of the merger are agreed upon by all parties, and the values of the businesses have been determined, the process can begin.

How much is my business worth?

There are several ways to go about valuating a business. A few popular valuation methods include:

  • Discounted cash flow (DCF) analysis: Arrives at a present value by discounting the free cash flow predictions of the future. If the resulting value is higher than the cost of the merger, the opportunity may be worth pursuing.
  • Comparable transactions method: Looks at the sale price of private companies, and the market value of publicly traded companies, with similar business models. This method works best if multiple transactions are compared and used in conjunction with other valuation methods.
  • Multiples method: Determines the maximum value for a business by multiplying your current revenues on a scale of one to two based on market conditions and the growth of your business. For example, the revenues of a fast-growing business in a good climate would generally be multiplied by two.
  • Market valuation: Like the comparable transactions method, this approach valuates your business based on the current market's appraisal of your assets as seen when similar assets were sold by other businesses. This method is focused more on the assets than the business as a whole and as such can be more helpful when determining ownership interest or the value of an intangible asset.

Valuation should be conducted by a third party that both companies agree upon. The process is thorough, taking into account debt, equity, revenue potential and other factors, and can often take several months to complete.

Examples of potential merger opportunities

Mergers and acquisitions don't just happen between large, multinational corporations. Small businesses have a lot to gain from pooling resources and combining talents. For example, doctors or lawyers with small practices may combine to compete against larger firms. Or manufacturing companies that produce complementary products can combine to offer a more complete solution to customers.

There are two main types of mergers: vertical mergers and horizontal mergers. Vertical mergers may involve a supplier or other company in a production chain, like a merger between an automobile manufacturer and steel production company. Horizontal mergers typically occur between competing companies, such as two law firms.

Additional considerations for merging businesses

The merger process is complicated and is made up of many moving parts. Here are a few things to keep in mind while settling the details of the agreement:

  • Consider merger-related expenses: Will you need additional office space or infrastructure? Will the new company need to take out a business loan to lease more office space or purchase equipment?
  • Align the values of both companies: Before the merger is agreed upon, make sure that the core values of the new company are agreed upon.
  • Keep communication open among all parties: During the process, ensure that employees, executives and managers are informed of goals, progress and expectations as much as possible.
  • Preserve stability when possible: Try to minimize the impact felt by employees, and when changes are necessary, make sure that they are organized and communicated effectively.

Speak with a Business Banker about financing your merger with a business loan from Citizens Bank

The merging of two companies is a common business practice, so be sure to work with consultants who have experience shepherding similar deals to completion. If you're considering a merger, and would like more information on the business financing that may be necessary, contact Citizens Bank about our business loan options today.



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